Geographic clustering by firms could influence local labor market dynamics by facilitating the pooling of skilled labor and by fostering competition over workers. Using longitudinal employee-employer matched data, this paper examines the extent to which observed patterns in earnings across locations can be attributed to the sorting of workers and firms in one high-technology industry. I outline a model in the spirit of Salop (1979) that predicts that clustering promotes greater assortative matching. The paper goes on to test the model’s predictions in the software industry, first showing that there is a large wage premium associated with both inter- and intra-industry clustering. Further, in line with the predictions of the model and in contrast to those of alternative models, firm size is increasing and wage dispersion decreasing in the degree of agglomeration. These results help to explain documented patterns of variation in earnings and firm size in some skill-intensive sectors across locations.